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Banks in the foreground as the BoE and Fed make rate decisions; Barclays, Lloyds, RBS all report results

Last updated: 06:00 30 Jul 2018 BST, First published: 13:00 27 Jul 2018 BST

Bank of England

It will be a big week to come for the UK’s banks, with four of the five bluechip names set to report first-half results, while interest rate decisions from both the US Federal Reserve and the Bank of England could also have big implications for sector margins.

Economists at RBC Capital expect the Bank of England’s Monetary Policy Committee meeting to finally raise UK interest rates by 25 basis points, predicting a unanimous 9-0 vote in favour of the move.

However, they do not see the BoE’s accompanying latest Inflation Report projections to result in wholesale changes for its UK growth and inflation forecasts, and the MPC may flag the risks of a potential global trade war after President Donald Trump’s crusade to protect US companies with a raft of tariffs.

Though the tariff tantrum has ramped up a bit since the last Federal Reserve policy meeting, the core of the FOMC is so far unconvinced that this warrants any material shift in the outlook.

Indeed, Fed chairman Jerome Powell was relatively sanguine on the tariff question in his recent semi-annual testimony to the US Congress.

Very little FOMC fanfare

The RBC economists expect the August FOMC meeting and press statement to come and go with very little fanfare.

In a preview, they said: “For one, it is quite rare to see significant tweaks in a meeting that is not accompanied by a press conference.

“But more importantly, things have not shifted significantly enough to warrant any notable alterations. Indeed, the idea that economic activity remains “solid” and that inflation is at/near the 2% target remains true.”

Meanwhile, there is no reason to think US July non-farm payroll numbers, due for release on Friday, will deviate significantly from the recent trend of gains of around 200,000, while the unemployment rate is forecast to tick down.

Lloyds still cleaning up PPI mess and HBOS scandals

Among the results, Lloyds Banking Group PLC‘s (LON:LLOY) interims on Wednesday, come but the lender still mopping up the mess of its past misconduct despite having had a successful post-financial crisis turnaround under chief executive Antonio Horta-Osorio.

The bank has set aside £100mln to compensate victims of fraud at its HBOS unit in Reading.

It also faces further claims for the payment protection insurance mis-selling scandal ahead of the Financial Conduct Authority’s August 2019 deadline. Lloyds has so far paid out £18.8bn in PPI claims. 

Analysts at UBS expect Lloyds to report statutory pre-tax profit of £887mln for the second quarter, including £410mln for PPI provisions, £262mln in restructuring costs and a £110mln loss on the disposal of its Irish residential mortgage portfolio.

Come Brexit, Lloyds is reportedly planning to operate three sUBSidiaries in continental Europe to ensure it can continue operating across the European Union. The bank has declined to comment on the reports so the market will also be looking out for any remarks on the matter.

Barclays facing pressure from activist investor

Investors in Barclays PLC (LON:BARC) will be hoping for an improved outlook from the bank with its first-half results on Thursday after completing its restructuring and resolving many of its legacy issues.

UBS forecasts Barclay’s first-half adjusted pre-tax profit coming in at £1.3bn, with a tangible net asset value per share of 253p.

However, recent news that the Serious Fraud Investigation is set to reinstate charges over its fundraising in 2008 with Qatar has raised concerns.

US activist investor Sherborne, which took a 5% stake in Barclays earlier this year, is also expected to put pressure on the lender to deliver results.

George Salmon, equity analyst at Hargreaves Lansdown commented: “If Barclays fails to get a slice of what’s been a bumper investment banking season on Wall Street then questions will be raised about the strategy of maintaining a transatlantic investment bank strategy.

“With some unpleasant rumblings from the UK housing market, the UK high street bank deserves its fair share of scrutiny as well.“

RBS dividend and restructuring in focus

Royal Bank of Scotland Group PLC (LON:RBS) is a step closer to returning to private hands after the government sold off a tranche of taxpayer-owned shares in the bank in June.

The government sold a 7.7% stake, reducing its holding to 62.4% after the lender reported its first annual profit in a decade in February and settled a US investigation into the mis-selling toxic mortgage-backed securities in May.

The US$4.9bn penalty with the US Department of Justice to settle the investigation was much lower than estimates around US$12bn and put to rest the lender’s largest legacy issue.

RBS reports its interims on Friday and will take a US$1.44bn charge related to the fine after setting aside US$3.46bn ahead of the settlement.

With the DoJ fine out of the way, investors are now turning their attention to the progress of the bank’s restructuring and the tIMIng of the resumption of dividends.

“The CEO's restructuring plans will shrink the group further through to 2020 and will shift its business towards retail and commercial banking,” said Graham Spooner, Investment Research Analyst at The Share Centre.

UBS expects RBS to report second-quarter adjusted pre-tax profit of £1.3bn, down from last quarter’s £1.4bn.

Income levels need to be sustained at StanChart

The last of the bluechip banking quartet to report will also be the first out of the traps, with emerging markets-focused Standard Chartered PLC (LON:STAN) to update the market on Tuesday.

Analysts at UBS forecast StanChart reporting adjusted pre-tax profit of US$2.4bn for the first half, with its Common Tier 1 equity ratio at 13.9%.

They pointed out that the banks first-quarter income was 2% below consensus, up 7% year-on-year after having starting the year up more than 10% year-on-year in January and February.

That income growth was driven by higher Transaction Banking and Wealth, while Financial markets, Corporate Finance and Retail Products were all softer than we forecast.

However, for 2018 consensus income forecasts to be realised, UBS added, the first quarter run rate income levels need to be sustained, reinforcing the role of capital markets – both within the wholesale bank and Wealth – to delivering the forecast top line.

Spoiler alert at BP

Away from banks, oil major BP PLC (LON:BP.) will continue the sector reporting season on Tuesday.

BP boss Bob Dudley probably should’ve shouted spoiler alert on Friday as the FTSE 100-listed firm announced its US$10.5bn US shale deal with mining giant BHP Billiton plc (LON:BLT).

Aside from the sheer gravity of the transaction, which will add 190,000 barrels of daily production and 4bn barrels of in the ground resources, the communications team presumably decided to bring forward what would otherwise make the financial results headline.

Seemingly, as something of a sweetener for BP’s more conservative, income-focused shareholders the company also announced its first dividend hike for some fifteen quarters, with the payout rising 2.5% to 10.25 US cents per share for the second quarter.

The question now is whether BP has left any powder dry for the second-quarter results, particularly as having already seen results from blue chip peer Royal Dutch Shell PLC (LON:RDSA)  we know that cash flow metrics will be among remaining key focuses for the market, alongside the obvious earnings and profitability.

Centrica pricing power eyed

Pricing and dividends will likely be among the focal points for investors when British Gas owner Centrica PLC (LON:CNA) releases its second quarter financial results on Tuesday.

One of the major talking points around energy stocks at the moment is the upcoming changes to how much British Gas, e-On et al will be able to charge customers on a standard variable tariff.

Investors feared how hard regulator Ofgem would hit energy suppliers.

Obviously, as one of London’s main ‘utility’ stocks there’s a huge emphasis on pricing and margin, and, thus the ability for gas and power firms to maintain shareholder payouts.

JP Morgan last month suggested Centrica expects to maintain its 12p full-year dividend, keeping the British Gas owner’s yield way over the FTSE 100 average of just under 4%.

Whatever the City soothsayers reckon, the market will be keen to see Centrica’s own guidance.

The summer heatwave will also feature, according to Graham Spooner, an analyst at The Share Centre.

“Off the back of SSE’s recent warning over falling demand due to the warm weather, investors could be expecting something sIMIlar,” the analyst said.

“Areas to concentrate on will be the ongoing restructuring, outlook for the year ahead and the dividend.  Confidence in the group and management is at a low ebb and long-suffering investors may have to consider the future sustainability of the dividend. The share remains close to a 10-year low.”

Cash-flow is king for Rolls-Royce

Away from the banks, engines maker Rolls-Royce Holdings PLC (LON:RR.) has been winning round sceptical brokers of late after a rough few years.

The FTSE 100-listed firm, known for its bureaucracy, announced a restructuring in June aimed at saving £400mln a year in costs, although initially the redundancies and other costs involved would cost the company £500mln spread over three years.

Brokers have been focused on the company’s cash flow. In June, the company said that its full-year guidance for group free cash-flow of around £450mln – give or take £100mln – remained unchanged.

Citigroup thinks the factors causing the current cash-flow problems are essentially transient and boil down to: 1) new generation engine losses; 2) a step change in market share; 3) some in-service problems, mainly on the Trent 1000.

“We do not believe that the problems facing the Trent 1000 issues (accelerated maintenance and IPC blade resonance) will migrate to the next generation engines (Trent XWB, 1000-TEN or Trent 7000) for both technical reasons and increasingly promising in-service data,” the US bank said.

Deutsche Bank, meanwhile, is forecasting Rolls-Royce to post revenue of £6.86bn, which is more or less unchanged from the first half of 2017.

Earnings before interest, tax and amortisation will be a paltry £2mln while the underlying loss before tax is expected to be £61mln, versus a profit of £287mln a year earlier.

Flat earnings seen for BAE Systems

Half-year results from defence company BAE Systems PLC (LON:BAE) are likely to see the company’s wheels spinning just to stand still.

At its annual general meeting in May the company reiterated its forecasts for flat earnings over the full-year, since when it has announced a couple of big contract wins – one for £20bn with the Australian navy and one for £2.4bn from the UK.

Meanwhile, a soap opera that appears to have run longer than “The Archers” - negotiations with Saudi Arabia over the terms of its intention to buy 48 Typhoon fighter jets – drags on but shareholders live in hope of a breakthrough.

Deutsche Bank has forecast half-year revenues of £8.6bn, which would account for 47% of its full-year expectation; last year, 49% of BAE’s revenues came in the first half.

The bank has predicted underlying earnings (EBITA) of £860mln, which implies a margin of 10%.

“Finally, turning to cash, due to the usual seasonality around working capital, together with the reversal of some of the late 2017 inflows flagged by BAE, which boosted last year's FCF [free cash-flow] (£100m VAT receipt and £300m advance for Saudi support), and with new advances linked to potential Saudi & Qatari Typhoon contracts unlikely until 2H, we forecast a small FCF outflow (£76m) in 1H18,” Deutsche Bank said.

Strikes and overcapacity to hit IAG

Last month’s traffic and capacity update for British Airways-owner International Consolidated Airlines Group PLC (LON:IAG) made for good reading, with passenger numbers and load factors both up sharply across all of its airlines.

The issue for the sector has been overcapacity though, meaning companies have had to slash their prices just to get people on board and remain competitive. That has weighed on IAG shares, which are down more than 8% over the past six weeks.

Air traffic control strikes are also likely to have had an impact on the firm’s second quarter, particularly within its Vueling division.

With margins taking a bit of knock of late, fuel and staff costs will be keenly eyed, although IAG said it managed to keep those under control in its Q1 update back in May.

Away from its own performance, the market will hope to see some commentary on its acquisition plans, with rumours repeatedly suggesting another bid for Norwegian Air might be forthcoming.

Hot weather good for Next?

Once again, the latest trading news from clothing and homewares retailer Next Plc (LON:NXT) is expected to show continued strength online offsetting further declines in its store sales, although it will be interesting to see what the firm has to say about the impact of the recent very warm weather.

Back in May, Next raised its full-year profit forecast after a bout of sunny weather led to better-than-expected first quarter sales.

The FTSE 100-listed firm saw its full price sales in the 14 weeks to May 7 rise by 6% as an 18.1% increase in online sales offset a 4.8% decline at stores.

For the second quarter, analysts at UBS are forecasting Next to report a 6.5% drop in Retail like-for-like (LFL) sales, but expect a 12.5% jump in Online full price sales, which would give total full price sales up 2.8% in the period.

Over the first-half, UBS forecasts Retail LFL sales falling by 6.0%, with Online full price sales up 15.5% giving total full price sales growth of 4.1%.

Next lifted its central guidance for annual pre-tax profit to £717mln in May, up from a previous estimate of £705mln, which represents a 1.3% decline on the prior year, and the analysts expect this to be maintained.

Taylor Wimpey to test housebuilders’ heath

The last we heard from Taylor Wimpey PLC (LON:TW.) it said the underlying housing market had remained stable in the first four months of 2018.

It also had a moan about the impact the “Beast from the East” was having on visits to its sites and build rates so the recent glorious weather should have put the Senior management in a sunnier disposition.

As at 22 April 2018, Taylor Wimpey’s total order book value stood at around £2.155bn (2017 week 16: £2.210bn) and analysts will be watching this figure closely to determine the general health of the house-building sector.

World Cup watch for William Hill

William Hill plc is expected, in some quarters, to report flat earnings and as the bookmaker’s share price has walked back from the recent US deregulation triggered rally, investors will keenly look to the future guidance when its interim results statement is released on Friday.

Looking to the opening up of the US market, in a note last month, Shore Capital analyst Greg Johnson said: “In our recent research on Paddy Power Betfair we estimated that the market is attaching some £3bn valuation to its US operations (which is forecast to be broadly breakeven).

“This is greater than William Hill’s current enterprise value. Applying the same methodology to William Hill (15x 2018F earnings adjusted for FOBTs and excluding US) we isolate the US opportunity at some £800m; of which its highly profitable Nevada operations account for c40% (£300m). 

“The group is already live in New Jersey and we estimate the current valuation is discounting a c3.5% share in the potentially $20bn US sports betting market. This appears fair at this stage, balancing the uncertainty and potential for corporate activity.”

In terms of the results themselves, William Hill is expected to show a strong performance for its online business and, of course, the football World Cup-related activity will also be a factor in the financials and customer measures.

“The big question from investors with these figures will be whether the bookmaking group saw any significant benefit from the World Cup,” said Graham Spooner, an analyst at The Share Centre.

“As the numbers will only cover the first two weeks of the tournament the market will be interested in any comments from management about wager levels overall.”

Key takeaways for Just Eat

The World Cup and hot weather proved to be something of a god-send for the pubs and supermarkets, but what about Just Eat PLC (LON:JE.)?

We should find out in Tuesday’s half-year results. In theory, it makes sense for takeaway orders to soar during big sporting events as people invite friends over and order in some pizzas or a Chinese. But the hot weather might have meant the public opted for beers and barbies rather than pizzas and pasandas.

As always, competition will be a key focus: are UberEATS and Deliveroo eating into some of its market share as their businesses mature? That was definitely the case in 2017, but UBS recently said it isn’t so sure about this year.

Other things to look out for are the integration of Hungryhouse – which is now completely under the Just Eat brand – and the performance of its international businesses. Fun fact: Just Eat delivered almost 22mln meals to households in Italy, Spain, Australia and Canada in the first quarter.

Little tasty expected from Greggs

Greggs plc (LON:GRG) issued a profit warning back in May which sent the stock tumbling, so the market isn’t expecting anything too tasty in Tuesday’s interim update.

The FTSE 250 bakery chain said like-for-like sales growth was slower than expected in the first quarter because of weak footfall on the high street and in shopping centres, which is where most of its shops are.

Some of that underperformance could be put down to the poor weather in March and April, so the recent run of warm weather might have helped; although, who wants a pasty in 30-degree heat?

Investors will be keeping an eye out for full-year profits guidance, which was reduced in May’s first-quarter update with the company now forecasts flat underlying profits this time around.

Also of interest will be the special dividend. Greggs is sitting on a decent little cash pile and analysts have long been speculating that an additional payout to investors could be on its way, although the slow start to the year might have thrown that into doubt.

Significant announcements expected this week:

Monday July 30:

Interims: Hiscox PLC (LON:HSX), Forterra PLC (LON:FORT), Dialight PLC (LON:DIA), JKX Oil & Gas PLC (LON:JKX), Keller Group PLC (LON:KLR), Reach PLC (LON:RCH), Senior PLC (LON:SNR)

Trading update: CYBG PLC (Q3) (LON:CYBG), River & Mercantile Group PLC (LON:RIV)

AGMs: National Grid PLC (LON:NG.), B&M European Retail PLC (LON:BME)

Economic data: UK BoE consumer credit, mortgage approvals; US pending home sales

Tuesday July 31:

Interims: BP PLC (LON:BP), Centrica PLC (LON:CNA), Taylor Wimpey PLC (LON:TW.), Just Eat PLC (LON:JE.), Greggs plc (LON:GRG), Standard Chartered PLC (LON:STAN), Rentokil Initial PLC (LON:RTO), Travis Perkins PLC (LON:TPK), Weir Group PLC (LON:WEIR), Elementis PLC (LON:ELM), IMI PLC (LON:IMI), Fresnillo PLC (LON:FRES), Gocompare.com PLC (LON:GOCO), LSL Property Services PLC (LON:LSL), Sabre Insurance Group PLC (LON:SBRE)

Finals: NWF Group plc (LON:NWF)

Trading update: Thomas Cook PLC (Q3) (LON:TCG), Glencore PLC (LON:GLEN)

Economic data: GfK UK consumer confidence; US personal income, personal consumption; US Chicago PMI

Wednesday August 1:

Federal Reserve US rate decision

Trading update: Next Plc (LON:NXT)

Interims: Lloyds Banking Group PLC (LON:LLOY), BAE Systems PLC (LON:BA.), Rio Tinto PLC (LON:RIO), St James’s Place PLC (LON:STJ), Smurfit Kappa PLC (LON:SMFT), Direct Line Insurance Group PLC (LON:DLG), Aggreko PLC (LON:AGK), Capita PLC (LON:CPI), Man Group PLC (LON:EMG), BBA Aviation PLC (LON:BBA), Dignity PLC (LON:DTY), Getbusy PLC (LON:GETB), StatPro Group PLC (LON:SOG

Finals: Hargreaves Services PLC (LON:HSP)

Economic data: BRC shop price index; UK manufacturing PMI; US ISM manufacturing; US manufacturing PMI; US construction spending; ADP employment report

Thursday August 2:

Bank of England UK rate decision, inflation report

Interims: Barclays PLC (LON:BARC), Rolls-Royce Holdings PLC (LON:RR.), Shire Plc (LON:SHP), Aviva PLC (LON:AV.), RSA Insurance PLC (LON:RSA), London Stock Exchange PLC (LON:LSE), ConvaTec PLC (LON:CTEC), Serco Group PLC (LON:SRP), Merlin Entertainments PLC (LON:MERL), RPS Group PLC (LON:RPS), Ferrexpo PLC (LON:FXPO), Inmarsat Plc (LON:ISAT), Spirent Communications PLC (LON:SPT), Portmeirion Group PLC (LON:PMP), UK Commercial Property REIT PLC (LON:UKCM), Non-Standard Finance PLC (LON:NSF)

Finals: Clipper Logistics PLC (LON:CLG)

Trading updates: Sage Group PLC (LON:SGE). Mitchells & Butlers PLC (LON:MAB)

Ex-dividends: To cut 2.7 points off FTSE 100 index - Micro Focus International PLC (LON:MCRO), RELX PLC (LON:RELX), Unilever plc (LON:ULVR)

Economic data: UK construction PMI; US weekly jobless claims; US factory orders; US challenger job cuts

Friday August 3:

Interims: Royal Bank of Scotland Group (Q3) (LON:RBS), International Consolidated Airlines Group PLC (LON:IAG), Cobham PLC (LON:COB), Mondi Plc (LON:MNDI), Essentra PLC (LON:ESNT), William Hill plc (LON:WMH)

Economic data: UK services PMI; US non-farm payrolls; US international trade; US ISM non-manufacturing; US manufacturing PMI

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